By: LINDSEY O’NEILL, ESQ
The Georgia couple who just won the $270 Million lottery seem to be the media favorite right now for the nicest couple to ever win the lottery! With big lottery jackpots like this, many of us wonder just what it would be like to actually win the lottery…. Since this is a legal website, I started wondering about the legal aspects of winning the lottery. Actually, there are many legal issues lottery winners must address at one point or another. Know this – if you win the lottery, it is highly recommended you consult with an attorney prior to claiming the winning ticket so that the various legal issues can be addressed and winning the lottery can be a good thing …. and not turn into nightmare. Some of the legal issues include the following:
1. What about privacy and the identity of lottery winners? Most winners’ names are published in the media, which can translate into a loss of privacy previously enjoyed. Some argue that the winners’ names should be published so that the public can be assured the state isn’t just keeping the money. Others argue that the celebrity created by a lottery winning can have negative consequences on lottery winners in terms of unwanted publicity. Depending on the circumstances, you may be able to protect your privacy by the way in which you choose to recieve the winnings. For example, there may be legal entities that can be created to in an effort to help mask your identity and save you from a fifteen-minutes-of-fame-gone-wild situation.
2. What about taxes on the winnings? Lottery winnings are considered taxable income. Whether received as a lump-sum payment or in multiple annual payments, the winnings are taxed as received. A trust may be a good option to hold the lottery winnings. Some of the tax advantages of a trust may include avoiding probate of the lottery proceeds upon death of the winner and minimizing taxes on the estate.
3. How must lottery winnings be split if the ticket was purchased jointly or by a pool of individuals? Many times lottery tickets are purchased with pooled funds from friends or colleagues. Was there verbal agreement to share the winnings with another person? Can that agreement be enforced under applicable state laws? (Some states prohibit contracts for gambling.) If multiple individuals own the winning ticket, a partnership may be a good entity to form to receive the winnings on behalf of all of the partners, rather than one individual receiving the checks.
4. Must the winner share the winnings with a spouse or a live-in significant other? Lottery money may be considered a marital property acquired during the marriage, particularly if the ticket was purchased with marital funds, and may be subject to division upon divorce. Even if the parties are not married, but are significant-others who live together, share living expenses, and have a regular practice of buying lottery tickets each week, there may be a joint-right to the winnings. Courts typically focus on the facts and circumstances surrounding the particular situation including the intent and understanding of the parties in order to ascertain the legal rights of the individuals.
5. Can the winner(s) gift some of the money to family and/or friends? A lottery winner can make a gift of some of the lottery winnings up to the annual exclusion limit without incurring gift tax liability. Making annual gifts in this fashion is a good way to share the winnings with family members and friends while mitigating the tax implications. Gifts made to another person’s education or medical care may have favorable tax treatment as well. Finally, gifts to charities can have certain attractive tax advantages for the lottery winner.
When a person wins the lottery, the advice and consultation of an experienced estate planning and tax attorney can be a huge advantage when dealing with the various legal and related issues. Ideally, a lawyer should be consulted prior to claiming the lottery prize so that the appropriate legal mechanisms can be put in place to minimize the hassles that may otherwise be associated with collecting the winnings. Use the attorney locator service on LawInfo’s home page to find an attorney in your area: http://www.lawinfo.com/.
For more information see also: Estate Planning, Asset Protection Attorneys, Taxation, Partnership, Find a Lawyer.
Lindsey O'Neill is the Director of Legal Content and Strategic Development at LawInfo.com. Ms. O'Neill is a California licensed attorney based in La Jolla and experienced in a wide variety of legal and business matters.
We work with lottery winners everyday. They utilize our services to advance their winnings. Our legal and practical advice for lottery winners is to do everything they can to remain anonymous, and spend only 10% of each check on luxuries. Anything else could be a gateway to financial turmoil.
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#2) Taxability of lottery winnings- the answer above is, (IMHO) incomplete/inaccurate. If the winner of a lottery has no SSN, then the winnings cannot be “taxable income”. The status of the “taxability” depends upon the tax status (or lack therof) of the “winner”. The answer above assumes that the winner is in a “covered” situation (as 99% of people are such).
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A Ruiz Reply:
September 12th, 2009 at 11:43 am
FYI- you need to be a legal resident to claim a lottery ticket. If you do not have a SSN you cannot claim the price.
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Anon Reply:
November 1st, 2009 at 11:37 pm
That isn’t necessarily true. Check your local and state laws before presuming anything. I randomly picked a state and came up with Florida. For example, the Florida lottery is as follows. Federal Withholding Taxes: Appropriate federal income taxes will be withheld from both Cash Option and annual payments at the time payments are made. If a Florida Lottery prizewinner is a U.S. citizen or resident alien with a Social Security number, the Internal Revenue Service requires the Florida Lottery to withhold 25 percent federal withholding tax from prizes greater than $5,000. If the prizewinner is a U.S. citizen or resident alien who does not have a Social Security number, the Florida Lottery is required to withhold 28 percent federal withholding tax from any prize of $600 or more. For nonresident aliens, the Florida Lottery is required to withhold 30 percent federal withholding tax from all prize amounts. The Internal Revenue Service requires the Florida Lottery to report all winnings of $600 or more for U.S. citizens and resident aliens.
So, like I said check your state laws.
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Question…if someone wins the lottery, can they create a LLC or “trust” in a state that does not charge state tax, such as Nevada, and assign percentages of that “trust” to individuals from the inception of the trust without having to pay “gift tax”, considering Nevada does not share personal ownership information on LLC’s, corporations or “trusts” with the IRS, and also considering the lottery winnings are claimed by the trust, not an individual?
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Brandon Reply:
June 22nd, 2009 at 11:55 am
Yes, he or she would still have to pay gift tax.
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Questions, what is the law regarding a U.S. citizens claiming winning from a lottery in another country, like Cananda?
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Ben Reply:
August 17th, 2009 at 6:31 pm
A woman from the US hit the Canadian lottery a few years ago for $5,000,000.00 when told by the crooks in the US that she would have to pay taxes on those winnings, she moved to Canada.
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ZAYTIGGY Reply:
October 13th, 2009 at 9:31 am
i would have done the same the samething but i would always come back to visit
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how is it any smarter to form a corporation than to form a trust to collect lottery winnings?
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jack Reply:
September 5th, 2009 at 8:53 pm
a trust…..but not just any kind of trust.
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I was just curious does lottery winnings affect someones government benefist like widows and disability.Someone told me that they put a stop to your lottery winnings and make you pay the money back like ssi or widows benefits.Is this true ?please get back to my email let me know
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No other country in the entire world taxes lottery winnings. Only the crooks in the US. Why should they tax other peoples money when they get a big chunk when tickets are sold initially. Why do the American people sit back and let this corrupt government crap all over them. It seems the American people enjoy being thrown a bone every so often. They get less than have the winnings when they hit the lottery, and pay taxes at the onset of receiving their winnings and every year when they get a check. It is sickening.
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Allison Reply:
August 27th, 2009 at 7:01 pm
It’s one thing to complain about taxes when you earn the money, it’s another when you just win it. If I were to win the lottery , I will happily give them the taxes owed. I would still be at LEAST a million times richer than I was the day before. And not all states in the US tax lottery winnings.
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Alan Reply:
August 28th, 2009 at 6:13 pm
Wait. When one plays the lottery, you agree to the terms of the game. It’s just a game with rules. If you don’t like the rules of the game, go play another one. It seems as if you believe you have an innate right to all of the money. Why? The lottery is not created to simply give money away. The whole idea is to generate money for local, state and federal government. That’s the whole point of all lotterys. It’s not a scam. Think about it a little bit more…
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You two people who commented are just the kind of people I am talking about. You enjoy the Bone that this corrupt government throws you once in a while. They do it so that you don’t complain after they rob you blind. They live the great life at the expense of the dumb American people. And Yes, I do plan on leaving this foul war monger country. Have a S*^y day.
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Jules Reply:
September 8th, 2009 at 12:18 pm
To be honest i have to agree with you. Yes, we agree to the rules on the ticket when we play, and a huge chunk of that tiket money goes to the government, a smaller to our local schools and a tini tiny goes to the stores. But it is not just in the lotto, americans appear very happy to give their wealth way to just about any institution, regardless of what it uses th $$$ for. Take your Banks, they steal left right and center. So Ben, although i dont like your language, i understand where it comes from. It is very frustraiting to deal with sheep. Woof!
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Somebody breakdown the following scenario:
You will 10 million dollars and you take the lump sum.
-What is likely to remain? Roughly half? 5-6 mil?
-What tax rate would you pay on this remainder? 35%?
-Or are taxes taken out immediately, which is part of the reason why you end up with only 5-6 million left?
-If you give five friends $100,000 each, will you, as a giver, have to pay taxes for giving this money away?
-Is there a special rate that your friends have to pay on this gift money, or is it just based on what tax bracket this gift pushes them into?
All fun questions I’ve pondered over the years…
Thanks
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If you are a citizen of another country, lets say Canada.. and you win the lotto on the US do you still have to pay the US taxes on the winnings? Even if you dont reside in the states? Also could they just move back to Canada and not pay?
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Lindsey Reply:
September 11th, 2009 at 10:33 am
Hi Jules. Here is a clip from the U.S. Internal Revenue Service website regarding taxation of lottery (and other type of gambling) winnings for foreign persons:
“Foreign Persons
“Payments of gambling winnings to a nonresident alien individual or a foreign entity are not subject to reporting or withholding on Form W-2G. Generally, gambling winnings paid to a foreign person are subject to 30% withholding under sections 1441(a) and 1442(a) and are reportable on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. Winnings of a nonresident alien from blackjack, baccarat, craps, roulette, big-6 wheel, or a live dog or horse race in the United States from legal wagers initiated outside the United States in a parimutuel pool are not subject to withholding or reporting. See Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.”
See: http://www.irs.gov/instructions/iw2g/ar02.html
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If we know that we have won a lottery (considering iam an L-1 Visa holder (with a SSN),can i go to the nearest lottery office (Not the Local gas store) and claim my prize ? Will i get a check at the office immediately or will i be getting a check to my home through postal mail or will the money be credited to my bank account ?
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If a lottery ticket is purchased on behalf of a not-for-profit organization that is a 501c(3), does that organization have to pay taxes on their winnings?
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Somewhere in all this is a lesson
I had a friend in the 1980’s that won, after taxes, close to a million dollars. A lot of us advised him to put the bulk of the money $900,00 in a 30 year 7% US bond. At that time, it was very easy to do at any large bank. Today, some 22 years later, he still would be getting an income of over $60,000 a year. Three years after winning he was broke.
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